Autumn Statement

Lord McKenzie of Luton Excerpts

Thursday 4th December 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I should like to touch upon three issues in my five minutes. The first has been prompted by a splendid article in the IFS’s Fiscal Studies, written by Paul Johnson, which encouraged a glimpse of what has been happening to tax policy in the UK, from the perspective of consistency and coherence. This is a chance to take some stock.

So far as income tax is concerned, we know that the Government’s focus has been on raising the personal allowance, at a cost of some £12 billion currently. There has been less focus on reducing the marginal rates of tax, specifically the basic rate. Policy under the coalition has complicated the starting point in a number of ways. The starting point for national insurance contributions has diverged from the point at which income tax has become payable; the contributions threshold has been maintained in real terms. I am not sure that we have ever heard a good reason and justification for that from the Government, particularly because they claim to be helping hard-working families—who of course pay national insurance contributions. Marginal income tax rates have been increased because of the transferrable allowance for married couples. That is because it is withdrawn once higher-rate tax becomes payable, so an extra £1 of income at the threshold can result in a £210 tax bill. Marginal tax rates are also affected by the taxing away of child benefit at income levels above £50,000. This can reach more than 70% for larger families. Marginal rates rise again, once income reaches £100,000, to 62%, then fall away. Can the Minister explain the thinking behind this rate structure and what coherence is attached to it?

We see again short-termism and the sticking-plaster approach in the treatment of the annual investment allowance for business. It was increased to £100,000 in 2010, cut to £25,000 in 2012, increased to £250,000 in 2013 and raised again to £500,000 in 2014. Can the Minister explain how this helps business to plan for the long term? However, we should acknowledge that changes have at last been made to the structure of what has been described as the UK’s worst-designed tax, stamp duty land tax. However, it is clear that our current tax system is far from coherent and consistent in all its aspects. I would not lay this charge just at the door of this Government, but we need to find a way to build a coherent tax system on a long-term basis.

My second point concerns the tax avoidance measures referred to by others. The thrust of these should be supported. Of course, much of the avoidance and evasion can be effectively challenged only by international efforts—by a global response. There is much being done by the OECD and the G20, particularly around base erosion and profit shifting, exchange of tax information and anti-hybrids. However, these wheels grind slowly. The measures listed in the Statement for domestic action demonstrate the scale and ingenuity of those who seek to avoid their obligations.

All this heralds another bumper finance Bill to add to the more than 2,500 pages the coalition Government have brought forward so far. It is inevitable that sophisticated avoidance is met by detailed, sophisticated anti-avoidance legislation, but it raises the question of how the parliamentary process can readily cope with all this, let alone have processes for post-legislative scrutiny. The headline measure is the diverted profits tax. This principle should obviously be supported, but it raises questions about how it is to be successfully implemented. Is it intended that it will be introduced as part of the BEPS—the base erosion procedures—with the OECD initiative or otherwise? Can the Minister say what discussions have taken place with the OECD on the proposal?

My final point is a reflection on the overall impact of this Government’s tax and benefits policy, which my noble friend Lady Donaghy touched on. The Minister will doubtless be aware of last month’s report, authored by the LSE and the Institute for Social and Economic Research at the University of Essex. This work examined the distributional impacts of changes to benefits, tax credits, pensions and direct taxes from an indexed May 2010 base. It is suggested that that analysis is not displaced by yesterday’s Statement. Its conclusion is that, overall, the net effect of these changes, so far as the public finances are concerned, is neutral. However, the distributional effect has certainly not been neutral. Overall, the poorest 20th of the population lost nearly 3% of their incomes and the next five-20ths nearly 2%. Apart from the top 20th, the income groups in the top half of the distribution were net gainers, as were the top 1%. This is largely because benefit reductions were greater for the bottom half than their gains from lower income tax. Remarkably, without having any net effect on the public finances, the effect of the reforms has been an income transfer from the poorer half of households to most of the richer half. How on earth does the Minister justify this? Why should the poor bear a disproportionate share? Is this truly a legacy of which the Government are proud?